I doubt that in the long history of the London Stock Exchange (LSE) there has been a time when so many investors have been so downbeat about its prospects. Every week seems to bring more declinist headlines.
Yesterday (31 October), analysts at investment bank Peel Hunt published a report in which they said small and mid-sized companies listed in the UK were trapped in a “doom loop“. And that this “relentless” decline wouldn’t end without intervention.
How should I react to this?
Here are my thoughts, as well as one AIM stock I’m buying anyway (if I don’t run for the hills first, that is).
Valid concerns
In all seriousness, the report highlighted some worrying facts:
- The FTSE Small Cap Index has lost 10% of its members this year and 30% in five years
- Firms are increasingly choosing US listings
- Mergers and acquisitions (M&A) are shrinking the market
- Hardly any initial public offerings (IPOs) are taking place to replenish disappearing stocks
The report said: “We are currently in a doom loop, where valuations are low, liquidity is reducing, investors are seeing withdrawals and there is little desire to IPO.”
The analysts argue the government should bring in reforms to reduce costs and bureaucracy to make it more attractive for companies to list in the UK.
Comparing apples to oranges
In May, it was reported that Apple’s market cap of $2.7tn exceeded that of the whole FTSE 350 put together. This was further evidence, it was argued, of the LSE’s decline.
But is this true? I’d argue it simply represents the mind-boggling success of Silicon Valley and the world-beating tech companies it has given birth to.
Obviously, the UK doesn’t have a Silicon Valley, but neither does anywhere else. That’s why US stocks account for around 59% of the value of all global equities. I wouldn’t be surprised to see that figure rise even higher.
The London market was Europe’s most valuable from 2003 when records began until Autumn 2022. That was when the Paris exchange (driven by luxury goods stocks) overtook it, accompanied by a deluge of media headlines.
But guess what? The LSE quietly regained its top spot in October. And hardly anyone noticed.
Investing anyway
London remains Europe’s most popular listing location, despite the IPO deep-freeze. And I fully expect firms to start listing again once market sentiment improves.
Meanwhile, the gloomy backdrop hasn’t put me off investing in smaller-sized UK shares, thank goodness. If it had, I would never have bought penny stock hVIVO (my best-performing UK share in 2023).
Also, I wouldn’t be looking to buy more shares of £383m-capitalised Ashtead Technology (LSE: AT.).
This a leading subsea rentals and services group that has been firing on all cylinders of late. First-half revenue rose 57% year on year to a record £49.8m, while pre-tax profit rocketed 87% to £14.3m.
This was driven by major growth in both its offshore renewable and offshore oil and gas divisions. And the firm is set up for long-term growth as offshore wind farms increase and existing oil and gas infrastructure is decommissioned.
To the company’s benefit, both markets are increasingly outsourcing their specialist equipment requirements.
On a forward-looking P/E ratio of 17, the shares aren’t cheap. But I think it’s worth paying up for this high-quality growth.
